E&P Sector – MARI emerges as the best performer in FY20

October 5, 2020 (MLN): The Oil and Gas Exploration sector faced quite a challenging year in FY20 in terms of not only financial performance but several other aspects that had an impact on the operations of companies across all sectors.

It is not a hidden fact that Pakistan’s economy, which was experiencing correction during the last two years, further deteriorated with the outbreak of COVID-19. Disruption in the supply of raw material from China, reduction in demand from export customers in Europe, and America, coupled with lockdown had a significant negative impact on Pakistan’s economy.

Naturally, some of the biggest industries across not just the country but the world, especially those involved in substantial fuel and lubricant consumptions faced a significant downturn. The E&P industry was particularly hit first due to low oil prices and then economic activities around the globe almost came to a halt due to lockdowns, drying out the demand for oil. Oversupply and lack of demand dragged oil prices further down so much so that oil futures started to trade in the red.

Financial Overview:

The Oil and Gas Exploratory sector suffered a 10% decline in the earnings during the year, and a 40% decline during the quarter ended June 30, 2020. The quarterly decline is said to be the lowest in the last 11 quarters as per a report by Topline Securities, on the back of lower revenues and non-core income.

The lower quarterly revenues, in turn, were an outcome of a fall in the average Arab Light oil prices, from $69/bbl in the same period of last year to $27/bbl in 4QFY20. The top line was also impacted due to the disruption caused by the outbreak of COVID-19 and the lockdown that was imposed subsequently, which resulted in several refineries halting their production of oil and gas.

The exploration costs declined during the year owing to less involvement of Pakistan Petroleum Limited in the exploratory activities, as the company faced a cash crisis owing to the issue of circular debt.

The other income fell by as much as 35% during the year because of the consistent depreciation of the local currency against the US Dollar, which resulted in lower exchange gains.

Company-wise, Mari Petroleum Company Limited (MARI) emerged as the clear winner as it depicted the highest increase in its earnings. The company reported a profit of Rs. 30.3 billion (EPS: 227.23) for the year, i.e. 24.6% higher than the figures recorded in the last year. The net revenue of the company increased by 21% owing to a rise in the wellhead price of the Mari Gas field and depreciation of the local currency against USD. It is interesting to note that the revenue increase despite more than a double increase in gas development surcharge.

Amongst the many costs of the company that increased during the year, the exploration and prospecting expenditure rose by 1.38x due to the acquisition of seismic data from Blocks-28. Another interesting factor was the increase in finance cost by around 28%, that too despite a decline in the interest rates by 625 basis points.

Pakistan Oilfields Limited (POL) posted net profits after tax at Rs 14.56 billion during the year, as compared to Rs 13.28 billion last year, showing an increase of 9.6%. This reflected in the company’s earnings per share which also grew by the same percent from Rs 46.77 to Rs 51.23.

The decline in gas production by 4% owing to drop in gas production from Tal Block amid lower demand from refineries during Covid-19 lockdowns and the decline in Oil production by 10% on account of lower production from Tal Block and Adhi field kept the company’s profitability in check.

The operating cost which declined by 8.65% and Exploration cost which also reduced considerably by 31.41 %, led the company to maintain gross margins at 52%. Furthermore, owing to lower exchange gains during the period, the other income declined by 33.8% to Rs 4.476 billion from Rs 6.76 billion. Moreover, finance cost has also been declined by 41.4% due to lower provision of decommissioning cost.

Pakistan Petroleum Limited (PPL) declared Profits of Rs. 49.4 billion (EPS: 18.16) for the year, i.e. almost 17% lower as compared to the earnings of last year. The decline in profitability was attributed to a dip in Sui wellhead price by 3%, decline in the oil and gas production by 12%, and 11% respectively especially during the lockdown, drop in oil prices by 25%, and PKR depreciation.

The oil production declined due to a drop in flows from Nashpa, Adhi, and Tal block amid Covid-19 lockdowns, whereas gas production declined on account of lower production from Kandhkot, Qadirpur, Tal Block, Adhi, and Nashpa. The exploration expenses came down by 34% due to the absence of dry wells, whereas other income dropped by 58% owing to the absence of hefty exchange gains despite lower exploration expenses.

The company booked finance charges of Rs. 1.12 billion, which is nearly 43% higher than the previous year due to an increase in the policy rate.

Oil and Gas Development Company (OGDC) observed a 15.47% decline in its net profits during the year, from Rs. 118 billion to Rs. 100 billion. The earnings per share of the company also nosedived by the same percent from Rs 27.53 to Rs 23.27. The net sales of the company went down by 6% due to a decline in International Crude Oil prices and the drop in the production of oil and gas amid lockdown. The major decline was seen in Tal block and Nashpa.

This is however likely to normalize in the coming quarters as the effect of lockdown has largely subsided, a report by Intermarket Securities stated.

The other major factors that caused the company’s income to decline were higher exploration expenses and admin costs. Exploration expenses jumped by 45.72% to Rs 18.2 billion, whereas, administration related cost grew by 23% YoY to Rs 5 billion. Furthermore, finance cost also depicted an increase of 78% YoY, on account of higher provision for decommissioning cost.

During the Fiscal Year 2020, the Oil and Gas Exploration sector snatched nearly 482 points from the KSE-100 index. MARI emerged as the only company out of the total four that contributed positively, adding 193 points to the benchmark index. On the other hand, PPL gave a really hard time to the sector as it took away a whopping 453 points from the index, followed by OGDC and POL that snatched 213 and 8 points, respectively.  

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Posted on: 2020-10-05T12:06:00+05:00

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